Each time a new no-action response emerges from Corp Fin, I take a quick look. Nearly every time, they are not newsworthy as they tend to not be all that exciting. But when this response to RingsEnd came out a few weeks ago, I was hesitant to blog about it because it was novel – yet no one else seemed to notice. More importantly, I was scared to blog because the Staff used to say they wouldn’t provide any guidance on Section 402 of Sarbanes-Oxley (hence the 25 law firm memo). Interestingly, former Rep. Mike Oxley – now at BakerHostetler – was involved in procuring the Staff position.

Here’s a description of the no-action letter from BakerHostetler:

In BakerHostetler’s Feb. 28 letter to the SEC staff, Messrs. Oxley, Gallagher and Reich sought guidance on Section 402 with regard to an innovative equity-based incentive compensation (EBIC) program that their client, financial services firm RingsEnd Partners LLC, developed with global financial institution BNP Paribas. The EBIC program contemplates that participating employees will receive company stock as incentive compensation and thereafter transfer those shares to an independently managed Delaware statutory trust. The trust could then obtain term loans from an independent banking institution, using some or all of the shares transferred to the trust as collateral. The letter notes that, in the absence of interpretive guidance on SOX 402, public companies have been reluctant to permit directors and officers to participate in the proposed program.

BakerHostetler contended that an issuer allowing its employees to participate in the EBIC program would not be extending or maintaining credit, or arranging for the extension of credit, in the form of a personal loan to employees subject to SOX 402. The lawyers noted that although a company would “need to perform certain ministerial tasks in order to allow its employees to participate in the EBIC program,” the company would “neither encourage nor discourage employee participation,” nor would the company “directly or indirectly make or guarantee the loans, or provide any extension of credit or other financial support” to the trust, its trustee, or trust beneficiaries (the employees). BakerHostetler argued that the legislative history suggests that under the final version of SOX 402, the phrase prohibiting a company from “arrang{ing} for the extension of credit” should be read no more broadly than prohibiting the company from providing a “loan guarantee or similar arrangement,” language found in earlier versions of SOX 402.

In the new guidance issued by the SEC, the agency’s staff wrote that an issuer that permits its directors and officers to participate in the plan “would not be deemed thereby, directly or indirectly, to be extending or maintaining credit, in the form of a personal loan to or for such individuals for purposes of Section 13(k) of the Securities Exchange Act of 1934” {SOX Section 402}. The SEC also wrote that an issuer that undertakes certain ministerial or administrative activities to permit its directors and officers to participate in the EBIC Program would similarly not be deemed, directly or indirectly, to be extending … or arranging for the extension of credit in the form of a personal loan to or for such individuals within the meaning of SOX 402.

The Board’s Role on Risk (& Risk Disclosures)

In this podcast, D’Anne Hurd, a risk mitigation consultant and long-time board member, explains how boards should handle risk and risk disclosures, including:

– What is the board’s role in deciding which risk factors to include in the 10-K?
– Is it a topic at board meetings or do directors send their own notes to the document drafter?
– Which board committee takes the lead on managing risk?
– How often should boards discuss risk? How should boards manage their time to ensure the topic is adequately tackled?

Struggling with your March Madness bracket? How about a strategy of picking winners based on which schools have the coolest alumni…